GOVERNMENT OF THE DISTRICT OF COLUMBIADEPARTMENT OF INSURANCE, SECURITIES, AND BANKING

)IN THE MATTER OF: )

)Surplus Review and Determination ) Order No: 09-MIE-006Regarding Group Hospitalization and )Medical Services, Inc. ) )

DECISION AND ORDER

Jurisdiction

This Decision and Order sets forth the findings and conclusions of the District of

Columbia (the "District") Commissioner for the Department of Insurance, Securities and

Banking (the "Commissioner") pursuant to the Hospital and Medical Services Corporation

Regulatory Act of 1996, effective April 9, 1997 (D.C. Law 11-245; D.C. Official Code § 31-

3501 et seq.) (the "HMSCR Act"), as amended by the Medical Insurance Empowerment

Amendment Act of 2008, March 25, 2009 (D.C. Law 11-369; 56 DCR 1346) ("MIEAA"), the

regulations under Chapter 46, Title 26 of the District of Columbia Municipal Regulations

("MIEAA Regulations"), and the District of Columbia Administrative Procedure Act, approved

October 21, 1968 (82 Stat. 1209; D.C. Official Code § 2-510 (2006 Repl.)). As required by the

HMSCR Act, this Decision and Order addresses whether Group Hospitalization and Medical

Services, Inc.'s ("GHMSI") surplus attributable to the District is excessive. The Commissioner

has the authority to make this determination and to issue this Decision and Order pursuant to

Section 7 of the HMSCR Act.

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Background & Procedural History

A. GHMSI's Congressional Charter

In 1939, the United States Congress incorporated GHMSI 1 and prescribed its charter

pursuant to An Act Providing for the incorporation of certain persons as Group Hospitalization,

Inc. (Pub. L. No. 76-395; 53 Stat. 1412 (1939) (amended by An Act making appropriations for

the government of the District of Columbia and other activities chargeable in whole or in part

against the revenues of said District for the fiscal year ending September 30, 1994, and for other

purposes (Pub. L. 103-127; 106 Stat. 1336 (1993))) ("GHMSI Charter"). The GHMSI charter

authorized and empowered GHMSI to enter into individual and group contracts to provide health

care services, as specified in their certificates. GHMSI Charter § 2. The GHMSI charter

prescribes the corporation's charitable mission:

This corporation is hereby declared to be a charitable and benevolent institutionand all of its funds and property shall be exempt from taxation other than taxes onreal estate.

Id. at § 8. The GHMSI Charter further provides:

Said corporation shall not be conducted for profit, but shall be conducted for thebenefit of the aforesaid certificate holders. The business and affairs of thiscorporation shall be conducted by its board of trustees, who shall have full powerand authority in the premises, including authority to provide for all expensesincident to the conduct and management of its business and affairs.

Id. at § 3.

GHMSI is domiciled in the District, and its charter obligates GHMSI to submit to the

regulatory authority of the Commissioner in accordance with the laws and regulations of the

District. Id. at §§ 1, 5-7.

GHMSI was originally incorporated as Group Hospitalization, Inc., and later merged with Medical Services, Inc.,to form GHMSI.

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In 1998, GHMSI joined with CareFirst Maryland, Inc. (then known as Blue Cross and

Blue Shield of Maryland, Inc.), to form a holding company, CareFirst, Inc., a non-profit

corporation domiciled in Maryland. GHMSI currently provides Blue Cross and Blue Shield

health care coverage in the District, Maryland, and portions of Northern Virginia.

B. The District's Regulation of GHMSI

Consistent with the terms of the GHMSI charter, the Council of the District of Columbia

enacted the HMSCR Act, establishing a comprehensive statutory framework for regulating

GHMSI's provision of health care services. Among other things, the HMSCR Act empowers the

Mayor (via the Commissioner) to monitor the financial aspects of GHMSI's non-profit business.

See D.C. Official Code §§ 31-3504, 31-3508, and 31-3509. Effective March 25, 2009, the

Council enacted the MIEAA, amending the HMSCR Act with respect to GHMSI's surplus and

open enrollment requirements, establishing a new community health reinvestment mandate, and

prohibiting GHMSI's conversion to a for-profit entity. See D.C. Official Code §* 31-3505.01,

31-3506, and 31-3514. The MIEAA also mandated the Commissioner's current review of

GHMSI's surplus and charitable activities.

In accordance with the Commissioner's authority granted under Section 4(a)(1) of the

Department of Insurance and Securities Regulation Establishment Act of 1996, effective May 27,

1997 (D.C. Law 11-268; D.C. Official Code § 31-103(a)(1)), and Section 25 of the HMSCR Act

(D.C. Official Code § 31-3524), the Commissioner issued an emergency and proposed

rulemaking, effective July 10, 2009, and an emergency rulemaking effective November 8, 2009,

that prescribed the procedures for the determination of excess surplus. 56 D.C. Reg. 005665

(July, 10, 2009); 56 D.C. Reg. 46 (Nov. 13, 2009). The Commissioner issued a Notice of Final

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Rulemaking on November 13, 2009, adopting the emergency rules as final. 56 D.C. Reg.

008841 (Nov. 13, 2009); see D.C. Mun. Regs. Title 26, ch. 46.

C. Procedural History

In accordance with Section 7(e)(1) of the HMSCR Act (D.C. Official Code 31-

3506(e)(1)) and Section 4601.4 of the MIEAA Regulations, former Commissioner Thomas E.

Hampton, on July 17, 2009, issued a determination that GHMSI's surplus exceeds, and is

expected to exceed, the greater of the National Association of Insurance Commissioners

("NAIC") Risk-Based Capital Authorized Control Level ("RBC-ACL") requirement and the

Blue Cross and Blue Shield Association minimum capital requirements. Commissioner

Hampton determined that GHMSI's surplus as of December 31, 2008, was "greater than

appropriate [RBC-ACL] requirements," as defined under Section 4601.4 of the MIEAA

Regulations. See Department of Insurance, Securities and Banking, 2009 Group Hospitalization

and Medical Services Inc. Adequate Surplus Determination (July 17, 2009).

On July 24, 2009, pursuant to Section 7(e) of the HMSCR Act (D.C. Official Code § 31-

3506(e)) and the MIEAA Regulations, Commissioner Hampton gave notice of a public hearing

to determine whether the portion of GHMSI's surplus attributable to the District is unreasonably

large and inconsistent with GHMSI's community health reinvestment obligations set forth in

Section 6a of the HMSCR Act. See 56 D.C. Reg. 005967 (July 24, 2009) [republished at 56

D.C. Reg. 006000 (July 31, 2009) to provide new location and correct typographical error].

On July 31, 2009, GHMSI submitted a report on its 2008 surplus ("GHMSI Surplus

Report") and a 2008 report from Milliman entitled "Need for Statutory Surplus and Development

of Optimal Surplus Target Range" ("Milliman Surplus Report"). Additionally, on August 31,

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2009, GHMSI submitted a pre-hearing report ("GHMSI Pre-Hearing Report"), which included a

second report from Milliman regarding the calculation of GHMSI's surplus attributable to the

District (GHMSI Pre-Hearing Report, Exhibit A) and a report from the Lewin Group ("Lewin")

analyzing both Milliman reports (GHMSI Pre-Hearing Report, Exhibit B).

On August 31, 2009, D.C. Appleseed submitted an extensive pre-hearing report, which

included legal analysis of the MIEAA by Covington and Burling LLP, an actuarial study from

Actuarial Risk Management, and a public policy report from Mathematica Policy Research, Inc.

On or before August 31, 2009, over a dozen community members and the Maryland

Insurance Administration ("MIA") Commissioner, Ralph S. Tyler, submitted letters and reports

for the record.

On September 10 and 11, 2009, the Commissioner held a public hearing (the

"Commissioner's Hearing") where representatives from GHMSI and various community

organizations, including D.C. Appleseed, testified, responded to questions, and submitted

statements for the record. The Commissioner's expert consultants, including Rector &

Associates, Inc. ("Rector"), who was retained pursuant to Section 7(h) of the HMSCR Act, also

participated in the hearing and had the opportunity to question witnesses.

Because GHMSI operates in Virginia and Maryland in addition to the District, the

Commissioner received several letters from community organizations and representatives from

those jurisdictions. All correspondence received urged the Commissioner to consider carefully

the impact of her decision on GHMSI members who reside outside of the District. At the

Commissioner's Hearing, MIA Commissioner Tyler also testified and submitted a statement for

the record. Commissioner Tyler informed the Commissioner that the MIA was in the midst of

examining GHMSI's surplus and expected to receive a report from an outside consulting firm,

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Invotex Group ("Invotex"), within approximately 45 days of the Commissioner's Hearing.

Accordingly, Commissioner Tyler asked the Commissioner to delay her final determination in

order for the two jurisdictions to continue working together.

Recognizing that MIEAA directs the Commissioner to consider the "interests and needs

of the jurisdictions in the corporation's service area," following the Commissioner's Hearing, the

Commissioner issued an order extending the time for her determination to a date no later than

December 31, 2009, and keeping the record of the Commissioner's Hearing open until 6:00 P.M.

on November 2, 2009. Department of Insurance, Securities and Banking, In re: Surplus Review

of Group Hospitalization and Med. Srvs., Inc., Order No. 09-MIE-001 (Sept. 24, 2009); see D.C.

Official Code § 31-3506.01(b).

On or before November 2, 2009, the Commissioner received over two dozen additional

submissions from community members, including an additional filing from D.C. Appleseed.

GHMSI also filed several post-hearing documents, including a rebuttal brief ("GHMSI Post-

Hearing Brief'), responses to questions posed during the hearing ("GHMSI Post-Hearing

Responses"), an independent report from Lewin regarding an "appropriate" level of RBC-ACL

for GHMSI ("Lewin Post-Hearing Report"), and data relating to GHMSI's community health

reinvestment contributions ("2009 D.C. Community Health Giving Data" and "2008 D.C.

Community Health Giving Data"). The complexity and importance of the surplus determination

was reflected in the diverse community opinions received regarding GHMSI's surplus and, if the

surplus is found to be excessive, how the excessive surplus should be attributed to the District

and used.

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On November 19, 2009, the MIA held a public hearing (the "MIA Hearing") on the

surpluses of GHMSI and CareFirst Maryland, Inc. At the hearing, Invotex presented its report,

and CareFirst and a few community members testified and made submissions to MIA's record.

Prior to the MIA Hearing, the Commissioner issued an order to reopen the

Commissioner's Hearing record for the limited and sole purpose of the Commissioner obtaining

and considering information and testimony provided at or in connection with the MIA Hearing.

Department of Insurance, Securities and Banking, In re: Surplus Review of Group

Hospitalization and Med. Srvs., Inc., Order No. 09-MIE-002 (Nov. 18, 2009). Subsequently, on

December 31, 2009, the Commissioner issued an order extending the time for her determination

to a later time after the completion of the Commissioner's review of GHMSI's surplus.

Department of Insurance, Securities and Banking, In re: Surplus Review of Group

Hospitalization and Med. Srvs., Inc., Order No. 09-MIE-004 (Dec. 31, 2009); see D.C. Official

Code § 31-3506.01(b).

On July 21, 2010, the Commissioner reopened the Commissioner's Hearing record for

the limited and sole purpose of including information from the Commissioner's experts,

including Rector's "Report to the Commissioner of the District of Columbia Department of

Insurance, Securities and Banking: Group Hospitalization and Medical Services, Inc." ("Rector

Report"). Department of Insurance, Securities and Banking, In re: Surplus Review of Group

Hospitalization and Med. Srvs., Inc., Order No. 09-MIE-005 (July 20, 2010. The

Commissioner's Hearing record closed on July 21 2010. Department of Insurance, Securities

and Banking, In re: Surplus Review of Group Hospitalization and Med. Srvs., Inc., Order No.

09-MIE-005 (July 20, 2010).

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D. Post-Hearing Legislation, Orders, and Partnership Agreement

During the Commissioner's review and analysis of GHMSI's surplus, the Council of the

District of Columbia and Congress enacted several pieces of legislation that could have a

significant impact on the operations of GHMSI.

On March 2, 2010, the Council enacted the Reasonable Health Insurance Premium

Increase Emergency Amendment Act of 2010 ("D.C. Health Insurance Premium Act"). The

D.C. Health Insurance Premium Act amended the HMSCR Act to limit GHMSI's annual rate

increases to be no more than 10% above the prior year's rates, unless the Commissioner

approves an increase up to 15% "upon receipt of adequate documentation supporting the

requested increase. " Id. at § 3.

Contemporaneous with enactment of D.C. Health Insurance Premium Act, the

Department entered four orders that reduced GHMSI's recently approved rate increases for

various products. See In Re GHMSI, Rate Filing # 1284 DC, Case No. IB-RF-01-10 (Mar. 3,

2010); In Re GHMSI, Individual Non-Medigap PPO/Blue Preferred Underwritten Saver Plan,

Case No. IB-RF-02-10 (Mar. 12, 2010); In re GHMSI, Rate Filing # 1277 DC, Case No. IB-11F-

03-10 (Mar. 12, 2010); and In Re GHMSI, Small Group Medical and Drug Products PPO HRA

and PPO HAS, Case No. IB-RF-04-10 (Apr. 13, 2010). The proposed rate increases ranged from

17.3% to 35% above 2009 premium rates, and the orders limited the rate increases to 12% above

the 2009 premium rates.

At the end of March 2010, the President signed into law the Patient Protection and

Affordable Care Act, Pub. L. No. 111-148, and the Health Care and Education Reconciliation

Act of 2010, Pub. L. No. 111-152 (collectively, "Federal Health Care Reform Acts"). The

Federal Health Care Reform Acts, among other changes, will expand oversight of health care

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plan premium rate increases, restrict the use of pre-existing condition limitations, and limit the

structure of health care plans.

In addition to the legislation impacting GHMSI, the District and GHMSI have entered

into a Public-Private Partnership Agreement ("Agreement") pursuant to section 15 of the

HMSCRA Act (D.C. Official Code § 31-3514(p)), which authorizes GHMSI to enter into a

public-private partnership with the District in lieu of meeting the new Open Enrollment Program

("OEP") requirements.

The Agreement includes the following major provisions:

• GHMSI shall pay to the Healthy DC Fund: (a) $5 million within five business days ofthe Effective Date of the Agreement, and (b) $5 million on or before January 15th of eachsucceeding year (representing an aggregate of $25 million in payments) during the termof the Agreement.

• The payments to the Healthy DC Fund shall be used for subsidies that expand healthinsurance coverage for low-income residents of the District.

• GHMSI shall continue to offer and shall provide maintenance and support for the existingOEP, with a maximum premium and other specified terms.

• GHMSI shall offer, through its affiliate, CareFirst BlueChoice, Inc., a new healthmaintenance organization product for new members of the OEP, and as an alternativeoption for current subscribers to the OEP.

• GHMSI shall design and submit for approval to the Mayor a targeted city-wide healthcare initiative aimed at improving nutrition and increasing physical fitness among theDistrict's senior citizens (individuals age 60 and older). Once approved by the Mayor,GHMSI shall promptly implement such senior citizen initiative and maintain and supportit throughout the term of this Agreement.

Findings of Fact

After full consideration of all testimony, reports, and other submissions in the record for

this matter, the Commissioner makes the following findings of fact:

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A. GHMSI's Policies, Members, and Providers

1. At the end of 2008, GHMSI had 36,752 individual policies with 12,905 (35%) of

those policies issued in the District, 9,816 (27%) issued in Maryland, and 14,031 (38%) issued in

Virginia. (GHMSI Post-Hearing Responses at 1).

2. At the end of 2008, GHMSI had 16,510 group policies with 3,712 (22%) of those

policies issued in the District, 9,263 (56%) issued in Maryland, and 3,535 (21%) issued in

Virginia. (GHMSI Post-Hearing Responses at 1).

3. At the end of 2008, GHMSI had 77 self-insured contracts, of which 25 (32%) were

based in the District, 43 (56%) were based in Maryland, and 9 (12%) were based in Virginia.

(GHMSI Post-Hearing Responses at 1).

4. At the end of 2008, based on the situs of the policy or contract, approximately 31% of

GHMSI's polices and contracts were located in the District, approximately 36% of the policies

and contracts were located in Maryland, and the remaining policies and contracts (approximately

33%) were located in Virginia. (Rector Report at 18).

5. At the end of 2008, GHMSI had approximately one million members. Approximately

32% of members were fully-insured by GHMSI, 33% of members were self-insured, and 35%

were Federal Employee Health Benefit Plan ("FEP") members. (GHMSI Surplus Report at 1;

GHMSI Pre-Hearing Report at 16).

6. At the end of 2008, approximately 10% of GHMSI's members lived in the District,

44% lived in Maryland, and the balance lived in Virginia and other jurisdictions. (Rector Report

at 20; see also Commissioner's Hearing 09/10/09 Tr. at 14; GHMSI Surplus Report at 2; GHMSI

Pre-Hearing Report at 16).

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7. Approximately 13% of the providers in GHMSI's provider network are located in the

District. An additional 12% of the providers in CareFirst BlueChoice's provider network, of

which GHMSI owns 40%, are located in the District. 2 (Rector Report at 20; GHMSI Post-

Hearing Responses at 1).

8. Based on the average of premiums reflected in Schedule T of GHMSI's Annual

Statements for 1999-2008, approximately 69% of GHMSI's premiums for this ten-year time

frame were attributable to policies or contracts issued in the District. Similarly, approximately

69% of claims expenses by situs of the policy are attributable to policies or contracts issued in

the District. (Rector Report at 21-22).

B. GHMSI's Surplus and RBC-ACL

9. GHMSI's surplus level as of December 31, 2008, was approximately $687 million.

As of the same date, GHMSI had an RBC-ACL ratio of approximately 845%. (GHMSI 2008

Annual Statements).

10.For each year from 2004 until 2007, GHMSI had RBC-ACL levels of 951%, 893%,

955%, and 916%, respectively. (GHMSI 2008 Annual Statements; GHMSI Surplus Report at 6).

11.If Blue Cross Blue Shield insurers, including GHMSI, do not maintain an RBC-ACL

level above 375%, they trigger the Blue Cross and Blue Shield Association's "Early Warning

Monitoring" threshold for "potential lack of financial soundness." (GHMSI Pre-Hearing Report

at 20).

2 This data reflects individual providers (practitioners) rather than provider groups. In addition, if a practitioner isaffiliated with multiple provider groups or office locations in multiple jurisdictions, the practitioner is counted onetime in each jurisdiction where the practitioner has an office location. If the practitioner has multiple officelocations in the same jurisdiction, only one location is included in the number of providers for that particularjurisdiction.

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12. The Milliman Surplus Report, which GHMSI commissioned prior to these

proceedings, concluded that an "optimal surplus target range" for GHMSI as of December 31,

2008, is 750-1050% RBC-ACL. (Milliman Surplus Report at 57).

13. According to the Milliman Surplus Report and additional data Milliman provided

Rector, the Milliman range represents the following: the bottom number of the range (750%) is

the amount of surplus Milliman calculates that GHMSI needs as of December 31, 2008, (1) to

not fall below 200% RBC-ACL at a 98% confidence level assuming a 2-year trend miss 3 and (2)

to not fall below 375% RBC-ACL at a 90% confidence level assuming a 2-year trend miss; the

top number of the range (1050%) is the amount of surplus Milliman calculates that GHMSI

needs as of December 31, 2008, to not fall below 375% RBC-ACL at a 95% confidence level

assuming a 2.5-year trend miss. (Rector Report at 3-4).

14. GHMSI also commissioned Lewin to determine an "appropriate range of surplus,"

and Lewin concluded that 750-1000% RBC-ACL is "an appropriate range of working surplus"

for GHMSI as of December 31, 2008. (Lewin Post-Hearing Report at 24). Although Lewin

indicates what RBC-ACL ratios and confidence levels it used to establish its range, it is not clear

what methodology or assumptions Lewin used in its analysis.

15. Appleseed commissioned Actuarial Risk Management ("ARM") to prepare an

actuarial analysis of GHMSI's surplus to determine whether the surplus was excessive. ARM

determined that GHMSI's surplus RBC-ACL range as of December 31, 2008, should be 400-

525%. (Appleseed Pre-Hearing Report, Exhibit B at 27).

16. Rector reviewed ARM's analysis and conclusions it reached in its report, and

determined that is was not appropriate to compare ARM's analysis to Milliman's analysis in the

3 Trend miss is the number of years assumed that is needed to identify and address rating fluctuations.

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same manner as it did with the other experts' reports because ARM did not have access to the

same information as Lewin and Invotex.

17. MIA's expert consultant Invotex concluded that an "appropriate" RBC-ACL range

requirement for GHMSI under Maryland law is 700-900% as of December 31, 2008. (Invotex

Report at 80-81). Although Invotex indicated that it relied on the Milliman methodology for its

analysis, it is not clear how the assumptions made by Invotex resulted in its range.

18. Rector, the Commissioner's expert consultant, did not determine a "range" of

acceptable or optimal surplus. Rather, based on its calculations, Rector determined that as of

December 31, 2008, GHMSI needs RBC-ACL of 600% to not fall below 200% RBC-ACL at a

99% confidence level assuming a 2.5-year trend miss, and that GHMSI needs RBC-ACL of

850% to not fall below 375% RBC-ACL at a 95% confidence level assuming a 2.5-year trend

miss. (Rector Report at 3-4).

C. GHMSI's Financial Obligations and Community Giving

19. In 2008, GHMSI paid approximately $7.1 million in premium taxes to the District. In

its submitted materials, GHMSI estimated that it expected to pay approximately $9 million in

premium taxes to the District by the end the 2009 calendar year. (CareFirst's 2009 D.C.

Community Health Giving Data; Rector Report at 25 (Ex. 2)).

20. GHMSI stated that it makes community health reinvestment contributions though

corporate sponsorships related to community health efforts, targeted giving, programmatic

giving, catalytic giving, and subsidies. (CareFirst Commitment: 2008 Year in Review at 2-18;

Rector Report at 25 (Ex. 2)).

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21. In 2008, GHMSI's contributions to the District's open enrollment program through

December 31, 2008, equaled approximately $3 million. 4 Program administration costs equaled

approximately $439,000. In its submitted materials, GHMSI estimated that it expected to

contribute approximately $4.1 million in subsidies for the District's open enrollment program in

2009. (CareFirst Commitment: 2008 Year in Review at 17; CareFirst's 2008 D.C. Community

Health Giving Data; Rector Report at 25 (Ex.2)).

22. In 2008, GHMSI's contributions to the District for corporate health-related

sponsorships, target giving, programmatic initiatives, and catalytic giving through December 31,

2008, equaled approximately $2.9 million. Its contributions to the District's open enrollment

subsidies equaled approximately $3.5 million, including administrative costs. (CareFirst's 2008

D.C. Community Health Giving Data; Rector Report at 25 (Ex. 2)).

23. GHMSI's new open enrollment program/public-private partnership is estimated to

cost $5 million per year, for a projected term not to exceed 5 years, subject to extension.

24. The majority of GHMSI members who submitted comments cited dramatic rate

increases in recent years and requested that any excessive surplus of GHMSI be returned to or

used for the benefit of its subscribers. See, e.g., Email from Dennis Bass, Deputy Executive

Director of Center for Science in the Public Interest (Oct. 28, 2009); Email from Beth C. Clark

(Oct. 27, 2009); Letter from Mark Gruenberg, President of Press Associates News Service (Oct.

26, 2009); Letter from Patricia Raz (Oct. 26, 2009); Letter from Stephen Bennett, President/CEO

of United Cerebral Palsy (Sept. 9, 2009); Letter from Bob Witeck, CEO of Witeck Combs

4 GHMSI provided slightly conflicting data regarding its contributions to the District's open enrollment programthrough December 31, 2008. In its "CareFirst Commitment: 2008 Year in Review" submission, OHMS! stated thatit provided approximately $3.3 million in subsidies for the District's open enrollment, but in a subsequent responseto a request for additional data from DISB's experts, GHMSI indicated that it had contributed approximately $3. I insubsidies to the open enrollment program. The approximately $200,000 difference does not have a substantiveeffect on the Commissioner's decision in this matter.

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Communications (Sept. 8, 2009); Letter from Bill Pullen (Sept. 8, 2009); Letter from Aubrey

Sarvis (Sept. 8, 2009).

25. GHMSI's financial position accounted for unknown financial pressures that it

anticipated would result from federal health care reform. Commissioner's Hearing 09/11/09 Tr.

at 41-42.

26.GHMSI's surplus level as of December 31, 2009, was approximately $761 million.

As of the same date, GHMSI had an RBC-ACL ratio of approximately 902%. (GHMSI 2009

Annual Statement).

27. The Federal Health Care Reform Acts will expand federal oversight of health care

plan premium rate increases and plan access, restrict insurers' use of pre-existing condition

limitations, and limit the overall structure of health care plans.

28. Several federal agencies and organizations, including the Department of Health

and Human Services, the Department of Labor, the Treasury Department, and the National

Association of Insurance Commissioners are currently drafting comprehensive regulations in

several phases to implement sections and related provisions of the Federal Health Reform Acts.

29. The first phase in the series of implementing federal regulations was a pair of

publications consisting of a Request for Information relating to the medical loss ratio provisions

of the Federal Health Reform Acts and a Request for Information relating to the rate review

process of the Federal Health Reform Acts, both published in the Federal Register on April 14,

2010 (75 FR 19297 and 19335). The second phase was interim final regulations implementing

coverage of adult children until age 26 published in the Federal Register on May 13, 2010 (75

FR 27122). The third phase was interim final regulations relating to status as a grandfathered

health plan, published in the Federal Register on June 17, 2010 (75 FR 34538) followed by

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interim final regulations published to implement the prohibition of preexisting condition

exclusions and regarding lifetime and annual dollar limits on benefits, restrictions on rescissions

and patient protections.

30. The impact of the Federal Health Reform Acts and their implementing regulations on

the health insurance market and on health insurers and all participants in the health insurance

markets are expected to be unprecedented, extremely significant, and are not fully known.

Commissioner's Analysis and Conclusions of Law

A. Applicable Laws

1. Congressional Charter

As discussed above, GHMSI' s Congressional charter mandates the corporation's powers

and charitable mission. Its primary mandate is to provide health insurance to individuals or

groups and to "cooperate, consolidate, or contract with groups or organizations interested in

promoting and safeguarding the public health." GHMSI Charter § 2. The charter dictates that

GHMSI is to be not-for-profit and is to be conducted for the benefit of its certificate holders. Id.

at § 3. It vests GHMSI' s board of trustees with the power and authority to conduct the business

and affairs of the corporation. Id. Additionally, the charter declares that GHMSI is to be "a

charitable and benevolent institution and all of its funds and property shall be exempt from

taxation other than taxes on real estate." Id. at § 8.

2. MIEAA

MIEAA added a new Section 6a to the HMSCR Act which provides, "[a] corporation

shall engage in community health reinvestment to the maximum feasible extent consistent with

financial soundness and efficiency." D.C. Official Code § 31-3505.01. "Community health

16

reinvestment" under MIEAA is defined as "expenditures that promote and safeguard the public

health or that benefit current or future subscribers, including premium rate reductions." Id. at §

31-3501(1A).

Section 2(d) of MIEAA amends the surplus requirements under the HMSCR Act and

requires the Commissioner to issue a determination as to whether the surplus that is "attributable

to the District" is excessive. The surplus may be excessive only if:

(1) The surplus is greater than the appropriate risk-based capital requirements as

determined by the Commissioner for the immediately preceding calendar year; and

(2) After a hearing, the Commissioner determines that the surplus is unreasonably large

and inconsistent with the corporation's obligation under 1§ 31-3505.011 [the community

health reinvestment mandate].

D.C. Official Code § 31-3506(e). 5

In July 2009, the former Commissioner determined that GHMSI, with a $686,779,719

surplus as of December 31, 2008, had an RBC-ACL level of 845%, which he determined to be

greater than the "appropriate risk-based capital requirements," as defined under section 4601.4 of

the MIEAA Regulations. See Department of Insurance, Securities and Banking, 2009 Group

Hospitalization and Medical Services Inc. Adequate Surplus Determination (July 17, 2009).

Accordingly, a public hearing was held in September 2009 to examine whether the surplus

attributable to the District is excessive by examining whether the surplus is "unreasonably large"

and inconsistent with the corporation's obligation to engage in community health reinvestment to

the maximum feasible extent consistent with soundness and efficiency.

5 The D.C. Official Code § 31-3506(e) appears to have an error by citing the corporation's obligation under "§ 31-3505(a)," which actually references the corporation's requirements for issuance of certificate of authority. Thecorporation's obligation is contained in § 31-3505.01. See also MIEAA § 2(c).

17

The MIEAA Regulations define the factors that must be considered when allocating

portions of the surplus as "attributable to the District." D.C. Mun. Reg, Title 26, § 4699.2.

Those factors are (1) the number of policies by geographic area, (2) the number of health care

providers under contract with the company by geographic area, and (3) any other factor that the

Commissioner deems to be relevant based on the record of the public hearing. Id.

According to the MIEAA Regulations, "unreasonably large surplus" means:

[A] surplus of a corporation that is greater than the sum of the following:

(a) The appropriate NAIC risk-based capital level requirements determined by theCommissioner and the Blue Cross/Blue Shield Association capitalrequirements based on the company's surplus from the immediately precedingyear; and

(b) The amount of surplus needed by the corporation to meet its expected andunanticipated contingencies.

Id. at § 4699.4. The Commissioner interprets the definition of "unreasonably large surplus" as

set forth in 26 DCMR § 4699.4 as referring to a surplus that is greater than the sum of these two

surplus levels. The intent of the Regulation is to define "an unreasonably large surplus" as a

surplus that exceeds the sum of the NAIC and Blue Cross and Blue Shield Association RBC-

ACL requirements and the amount of additional surplus above the required RBC-ACL levels that

is necessary for the corporation to meet its expected and unanticipated contingencies. Simply

put, "unreasonably large surplus" is any amount in excess of the RBC-ACL level that is

necessary for the corporation to meet its expected and unanticipated contingencies, assuming the

RBC-ACL level is at or above the NAIC and Blue Cross and Blue Shield Association RBC-ACL

requirements.

Additionally, in determining whether the surplus attributable to the District is

"unreasonably large," the MIEAA Regulations specify that the Commissioner may consider

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"actuarially determined risk exposures" and the "expected and unanticipated contingencies of the

company." Id. at § 4601.8. The anticipated cost for implementing MIEAA's open enrollment

requirement should also be considered in the determination. Id.

Additionally, in determining whether or not the surplus attributable to the District is

excessive, MIEAA requires the Commissioner to weigh the corporation's financial obligations

associated with its insurance business, including premium tax paid and the corporation's

contribution to the open enrollment program required under Section 15 of the HMSCR Act (D.C.

Official Code § 31-3514). D.C. Official Code § 31-3506(f).

If the Commissioner makes a finding that the surplus is excessive, then GHMSI must

submit a plan for dedication of the excess to community health reinvestment in a fair and

equitable manner. Id. § 31-3506(g)(1); D.C. Mun. Reg. Title 26, §§ 4603.1-.2. The plan may

consist entirely of expenditures for the benefit of current subscribers of the corporation. D.C.

Official Code § 31-3506(g)(2).

B. Analysis and Legal Conclusions

In accordance with the MIEAA and all other applicable laws within the context of

GHMSI's obligations under its Congressional charter, and based on a comprehensive record,

including expert actuarial opinions, submissions and testimony from GHMSI, D.C. Appleseed,

and various other community members, the Commissioner hereby concludes as follows

regarding GHMSI's surplus level:

1. The Expert Reports Overlap Substantially.

The record includes five expert consultant analyses regarding GHMSI' s surplus: the

ARM report, the Milliman Surplus Report, the Lewin Post-Hearing Report, the Invotex Report,

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and the Rector Report. However, the Commissioner does not accord any weight to the ARM

report because the methodology employed is unclear, and ARM lacked all the necessary data

from GHMSI to perform a comprehensive and accurate analysis of GHMSI's surplus.

Accordingly, the Commissioner used the other four expert analyses in reaching her

determination.

With the exception of the Rector Report, each report recommends an RBC-ACL range

that is either "optimal" or "appropriate." However, each "range" is based on levels of current

surplus that GHMSI would need so as not to drop below various RBC-ACL threshold targets.

The Rector Report also determines levels of current surplus that GHMSI would need so as not to

drop below various RBC-ACL threshold targets, but it does not apply any qualitative adjective to

its lowest and highest levels of RBC-ACL. All four reports use an actuarial modeling approach.

Invotex and Rector used the Milliman methodology and made adjustments to Milliman's

assumptions and calculations, and also examined other factors. Although it is not clear what

methodology Lewin used in its approach, Lewin did use an actuarial modeling approach.

Despite the various methods for developing the RBC-ACL range, the results of the four reports

overlap substantially. For example, based on calculations of GHMSI's surplus as of December

31, 2008, all four ranges determined by the experts include in the RBC-ACL range of 750% to

850% as a subset.

The Milliman Surplus Report primarily examines two issues—maintaining statutory

surplus and quantifying an "optimal surplus range." The major risk and contingency categories

the Milliman Surplus Report examines are: rating adequacy and fluctuation, unpaid claim

liabilities and "other estimates," interest rate and portfolio asset value fluctuations, overhead

expense recovery risk, other business risks, catastrophic events, and provision of unidentified

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development and growth. The two levels of RBC-ACL that the Milliman Surplus Report

concludes are important to measure are: 200% RBC-ACL, the level GHMSI needs to avoid a

statutory action level event and to avoid loss of the Blue Cross Blue Shield trademarks; and

375% RBC-ACL, the level at which the Blue Cross and Blue Shield Association's "Early

Warning Monitoring" is triggered. Based on various assumptions, its simulation of loss cycles,

pro forma projections, and consideration of the statutory and association thresholds, the Milliman

Surplus Report recommends an "appropriate target" for GHMSI's surplus as of December 31,

2008, to be within the range of 750-1050% RBC-ACL.

The low-end of the Milliman range, 750% RBC-ACL, represents as of December 31,

2008, (1) a 98% confidence that GHMSI would stay above 200% RBC-ACL assuming a 2-year

trend miss and (2) a 90% confidence that GHMSI would stay above 375% RBC-ACL assuming

a 2-year trend miss. See Rector Report at 3, n. 1. The high-end of that range, 1050% RBC-ACL,

represents as of December 31, 2008, a 95% confidence level that GHMSI would maintain a

surplus level above 375% RBC-ACL assuming a 2.5-year trend miss. The report states that such

a range should be "wide enough to allow for a reasonable degree of fluctuation in operating

results year-to-year, under normal operating circumstances, over a multi-year horizon."

(Milliman Surplus Report at 7).

Similarly, the Lewin Post-Hearing Report focuses on developing an "appropriate"

"working surplus range" that the insurer needs to maintain operations. The Lewin Post-Hearing

Report identifies its general risk categories, which are similar to those used to calculate RBC-

ACL ratios, as: underwriting risk, asset risk, cost of capital and credit risk, and operational and

business risk. Lewin also incorporated additional "vitality-related" considerations: planned

capital expenditures, anticipated business plan changes, direct subsidization of health care

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marketplace, and social mission philosophy and obligation. Like Milliman, Lewin centered its

calculations on GHMSI' s statutory and Blue Cross and Blue Shield Association threshold RBC-

ACL levels. The Lewin Post-Hearing Report's recommended range of 750-1000% RBC-ACL as

of December 31, 2008, reflects a 90% likelihood of GHMSI not dropping below 375% RBC-

ACL on the high-end and a 95% likelihood of GHMSI not dropping below 200% RBC-ACL on

the low-end. (Lewin Post-Hearing Report at 23). The Lewin Post-Hearing Report does not

specify its duration of trend miss but did indicate it used up to seven-year modeling periods to

assess confidence levels. Additionally, Lewin conducted a comparative analysis of unidentified

"comparable plans" to cross-check the "reasonableness" of its range in a historical context.

Lewin used other Blue Cross Blue Shield plans as peer-group companies with which they

uniquely share several characteristics: large market shares in their geography, coverage of a

disproportionate percentage of the individual and small group markets, inability to spread risk

across a wider geography, subject to additional scrutiny, and a lack of access to equity markets.

The Invotex Report develops an "appropriate" surplus range that is "adequate and

reasonable" for GHMSI to maintain given its business and risk profile, size and operations,

anticipated plans and forecasts, and "an appropriate degree of conservatism, consistent with

sound financial regulatory oversight of any insurer." (Invotex Report at 62). Invotex's analysis

relies upon Milliman's model, Milliman's work, and adjusted assumptions that were "developed

and agreed upon by Milliman and CareFirst." (Invotex Report at 68). Invotex also compared

GHMSI's surplus range to other mid-sized non-profit Blue Cross Blue Shield insurers that share

similar types of business with GHMSI. Their peer review found an average RBC-ACL ratio

range of 336-917% and concluded that GHMSI has "comparable" surplus compared to its peer-

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group members. Based on these factors, the Invotex Report recommends an "appropriate"

surplus range as of December 31, 2008, of 700-950% RBC-ACL.

On the other hand, the Rector Report recognizes that the characterizations of GHMSI's

surplus as "necessary," "optimal," and "appropriate," are subjective and that all of the "ranges"

discussed are actually based on calculations regarding the amount of surplus needed for OHMS!

to remain above 200% and 375% RBC-ACL levels. See Rector Report at 3-4. Although the

Rector Report notes shortcomings of the Milliman methodology, it also generally recognizes the

methodology's usefulness in analyzing the amount of surplus GHMSI requires for future

operation. After making adjustments to Milliman's assumptions, the Rector Report calculates

that as of December 31, 2008, 600% RBC-ACL would provide a 99% likelihood that GHMSI

would remain above 200% RBC-ACL assuming a 2.5-year trend miss, and that 850% RBC-ACL

would provide a 95% likelihood that GHMSI would remain above 375% RBC-ACL assuming a

2.5-year trend miss.

The Rector Report agrees with the rationale behind the peer review analysis performed

by Invotex. However, to provide the Commissioner with additional relevant data, the Rector

Report analyzes the surplus of for-profit stock insurance holding company systems. Rector

explains that it added for-profit stock companies to the not-for-profit companies reviewed by

Invotex because MIEAA requires GHMSI to engage in community health reinvestment to the

maximum feasible extent consistent with financial soundness and "efficiency," and for-profit

insurers, in many ways, face greater pressures to maximize efficiency while remaining

financially sound. See Rector Report at 12-13; see also D.C. Official Code § 31-3505.01. The

Rector Report observes that "for-profit insurers often are recognized as having more efficient

operations due to the pressures exerted by the capital markets on for-profit insurers' profitability

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goals." (Rector Report at 12). However, the Rector Report also acknowledges that for-profit

stock insurers often have access to capital that is not available to non-profit Blue Cross Blue

Shield plans. (Rector Report at 12).

The Rector Report's peer analysis includes RBC-ACL levels for over 20 individual

insurers within two publicly traded systems and one privately held system. The RBC-ACL

weighted average for the publicly traded companies is 470% RBC-ACL, and the RBC-ACL

weighted average for the privately held companies is 700% RBC-ACL.

Importantly, the Rector Report had the benefit of including in its analysis the most recent

health care reform legislation and Department orders regarding GHMSI's premium rate

increases. The Rector Report noted that the limitations on GHMSI's rate increases were not

factored into the actuarial work of any of the expert consultant analyses, and the conclusions in

those reports would need to be adjusted accordingly. (Rector Report at 10). Moreover, the

Rector Report observes that the Federal Health Reform Acts establish "a wide range of health

care and insurance changes and reforms." (Rector Report at 10). Although it is not yet clear

what those changes will be or how they will impact GHMSI's surplus,6 the actuarial work

included in all of the expert consultant analyses would need to be adjusted to accommodate the

reform.

2. Additional Information of the Impact the Federal Health Reform Acts isNecessary for the Commissioner to Determine Whether GHMSI'sSurplus is Excessive.

The Commissioner concludes that it would be problematic to make a final determination

regarding the various expert opinions given the current uncertainly of the impact of the Health

Reform Acts on the operations of GHMSI. Rather, the Commissioner determines that it is

6 For many aspects of the Federal Health Care Reform Acts, administrative rules, guidance, and procedures stillneed to be adopted, and such agency actions will have a substantive effect on the reform's impact on health insurers.

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necessary for her to obtain and consider additional information regarding GHMSI's

unanticipated costs, if any, to comply with the various tranches of regulations implementing the

Federal Health Reform Acts. This information is critical in order to attribute the relevant weight

to the several expert analyses under consideration, and to ultimately determine whether

GHMSI's surplus is excessive under the HMSCR Act. Therefore, the Commissioner will be in a

better informed position to conclude which assumptions regarding future GHMSI costs and the

appropriate level of surplus are correct, and the interests of the District would be better served, if

the Commissioner's Hearing record is reopened to allow for the submission of relevant

information regarding the impact of the Federal Health Reform Acts on GHMSI from GHMSI,

interested parties, the Commissioner's Experts, and members of the public.

Order

Based upon the foregoing Decision, it is therefore ORDERED:

1. The record of the Commissioner's Hearing shall be reopened on August 6, 2010, for

purpose of the Commissioner obtaining information regarding the financial impact of the Federal

Health Reform Acts on GHMSI from GHMSI, interested persons, the Commissioner's Experts,

and members of the public as part of the Commissioner's determination of whether the portion of

GHMSI's surplus attributable to the District is unreasonably large and inconsistent with

GHMSI's obligation under Section 6a of the HMSCR Act, and the Commissioner's Hearing

record shall close at 5:00 p.m. on September 30, 2010.

2. GHMSI, no later than September 3, 2010, shall submit to the Commissioner

comprehensive information regarding the financial impact of the Federal Health Reform Acts on

GHMSI, including the appropriate level of GHMSI's surplus and GHMSI's financial obligations

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arising in connection with the conduct of the its insurance business as required pursuant to

section 7(f), and such submission(s) shall be posted on the Department's website within two days

of receipt. GHMSI shall include written justification of GHMSI's costs, if any, to comply with

and implement the provisions of the Federal Health Reform Acts.

3. No later than September 20, 2010, interested persons, the Commissioner's Experts,

and members of the public may submit information regarding the financial impact of the Federal

Health Reform Acts on GHMSI or rebut any information provided by GHMSI pursuant to this

Order, and all such submissions shall be posted on the Department's website within two days of

receipt.

4. GHMSI may submit information that rebuts any information submitted pursuant to

paragraph 3 of this Order prior to the close of the Commissioner's Hearing record at 5:00 p.m.

on September 30, 2010.

5. Subsequent to the closing of the Commissioner's Hearing record, the Commissioner

shall issue, in writing, the Commissioner's final determination of whether the portion of

GHMSI's surplus attributable to the District is unreasonably large and inconsistent with

GHMSI's obligation under section 6a of the HMSCR Act upon the completion of the

Commissioner's review of the information submitted pursuant to this Order.

SO ORDERED:

This day of August, 2010.

Approved and so Ordered:In Witness Whereof, I have hereunto set my hand andaffixed the officipl seal of this Department in the District ofColumbia, this 40 da st, 24 0.

Gennet PurcellCommissioner

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